In this article:
How do VRBO properties work?
Launched in 1995, VRBO, or Vacation Rentals by Owner, is an online platform that allows individuals to find and rent vacation properties from individuals that directly own or manage the property. In recent years, there has been a surge in popularity for these types of arrangements offered by VRBO and similar companies like Airbnb. VRBO continues to stand out from other companies as a leader by only offering full property rentals and no shared space rentals. VRBO gives renters an alternative to traditional hotel and motel bookings when it comes to temporary housing for vacations, work trips, or a simple change of scenery. Renters are drawn to VRBO because it offers options that are both unique and affordable. The types of property a renter may be able to book through VRBO include:
- Single-family Houses
- Beach houses
How do people use VRBO as a business?
Small business owners that use vacation rentals for revenue earn an average of $33,000 per year, but the earning potential is unlimited. The amount of annual revenues a VRBO business can make really depends on the business plan of the owner and the amount of risk/debt they are comfortable with. Just like many other industries, entrepreneurs that choose to start a small business as a VRBO property owner have several business models to consider including:
- Passive – Some property owners choose to earn passive income by renting out their primary residence through VRBO a few times a year. While their home is occupied by customers, the property owner may be on vacation or staying with friends and family.
- Side hustle – Entrepreneurs can purchase real estate for the purpose of renting it out through VRBO platforms. The additional property can become a source of extra money that doesn’t intrude on the owner’s full-time job or residence.
- Full-time – Business owners that are looking to profit from the next million dollar business idea can purchase multiple properties, hire a property manager, and earn a full-time income.
Ultimately, starting your own business as a VRBO property owner can be whatever you want it to be. The amount of money business owners can make will depend on the number of rental homes, location, marketing and growth strategies, management styles, and of course, customer demand.
How to start a VRBO
The steps you need to take to start a VRBO business will depend on the business model you choose. Whether you rent out your primary residence or purchase several new properties, the same basic guideline should be followed.
An important part of every business plan is research. For VRBO businesses, entrepreneurs should research the housing market in the area you’re looking to start your business in. When doing research for a VRBO, consider the following:
- Housing market in the area
- Rental occupancy trends in the area
- Commercial real estate prices
- Residential real estate prices and mortgage rates
- Property tax costs in the area
- Local competition providing similar properties, services, and amenities
- Vacation rental prices in the area
Entrepreneurs in the real estate business should get a property inspection of any structure they are renting to the public to protect themselves from liability, damages, and unexpected repairs. Aside from being required by some banks, lenders, and insurance companies, the inspection is a useful tool to accurately budget upcoming operating expenses and necessary capital expenditures, like roof replacements and HVAC repairs. Property inspections also protect future guests from injury and illness, which is appealing to potential customers.
Consult a CPA
VRBO businesses are required to pay several types of taxes, including property taxes, income taxes, and sales taxes. Federal and local tax rates may determine if the VRBO is set up as a limited liability company (LLC), Sole Proprietorship, Corporation, or have no formal organizational structure. The best way to understand tax obligations is to speak to a certified public accountant (CPA) or another tax expert.
Get the right insurance
Depending on whether the rental property is also the business owner’s primary residence, VRBO business owners are required to have either a homeowner’s insurance policy that allows them to act as a landlord or a business insurance policy, which includes property insurance and general liability insurance.
An advantage of using a national brand like VRBO is that listing rental properties on the online platform provides exposure to countless new customers. Setting up your rental property to look unique and appealing to potential renters is key, as is the photos and description you use on the VRBO website. Descriptions that use SEO strategies and include popular keywords tend to attract more business. In addition to appearing on the VRBO site, entrepreneurs can also grow their business by marketing the property on social media platforms, like Facebook Marketplace. Of course, the most important thing is to get solid customer reviews by making sure your listing is accurate and you respond promptly to customer communications.
Consider the costs
Before deciding whether a VRBO vacation rental business is the right investment for you, consider the three main types of capital needs for a VRBO business.
- Capital expenditures include the funding required to purchase or maintain fixed assets, like a house, building, vehicle, or land. Capital expenditures may also include furniture, fixtures, carpet, elevators, and equipment.
- Repairs and maintenance expenses may include the cost of maintaining the yard or grounds at the property and preventative maintenance of the home.
- Operating expenses include the cost of real estate like the mortgage payment, insurance costs, and taxes. They also include the expenses required for cleaning, supplies, utilities, VRBO fees, and HOA payments.
Financing options for VRBO businesses
There are several different financing options for VRBO property owners and homeowners that are interested in earning passive income. The type of loan that works best for a VRBO business depends on the business needs and the loan amount.
Real Estate Loans
If capital is needed to purchase a new home or building for the VRBO business, then a commercial real estate loan, traditional mortgage, or cash-out refinance may be a viable option for the entrepreneur.
- Commercial Real Estate loans (CRE) are a type of financing for purchasing or expanding a building or land. CRE loans usually have loan terms up to 30 years and can have a fixed or variable interest rate like a term loan. They require a significant down payment and a borrower with a good credit score.
- Traditional home loans, like conventional mortgages, FHA loans, and VA loans. When the loan is for a second home or vacation rental property, down payments are typically 25% and the repayment terms include higher interest rates than with primary residences because short-term rental properties carry more risk.
- Cash-out refinance is a type of lending option where borrowers can convert their home equity into cash. In real estate investing, the cash from the refinance can be used to purchase additional properties or cover the operating and maintenance costs of a current VRBO property or Airbnb rental.
Term loans are a common type of financing used to cover large purchases, maintenance costs, or other operating expenses. A term loan allows vacation rental owners to receive a lump sum of money upfront that is repaid over time with a set number of payments. The approval requirements vary for term loans, and the application process may include a review of the business owner’s financial records, including calculating the debt-to-income ratio (DTI) of the property owners. Creditworthiness is used to determine the amount, if any, of the required down payment. Borrowers with bad credit history may also consider a term loan that is secured, using a personal guarantee or asset as collateral. Obtaining a copy of your credit report is recommended before beginning the application process.
Short term loans
Traditional term loans do not work for every real estate investing business. Financing options for these business owners include short-term loans with repayment terms of less than five years, business lines of credit, and working capital loans.
- A business line of credit is often considered a short-term loan. This type of revolving credit offers borrowers the capital they need when starting a VRBO business with a great deal of flexibility. Lines of credit offer fast funding, but typically have higher interest rates than real estate or term loans. This type of financing is common for cash flow fluctuations, large purchases, and property management.
- Working capital loans can be another great financing option property owners because they are used for short-term, small business ventures. They offer fast funding times so are great for borrowers that need to act quickly on an investment opportunity or emergency maintenance expense.
Tips for getting the best financing for VRBO properties
Loan applications can be tricky for vacation property financing because every type of loan has its own eligibility requirements and stipulations about rental income. To secure the most favorable loan terms, try implementing the following best practices.
Increase the down payment
Borrowers with rental properties often pay higher interest rates and are approved for shorter loan terms. To improve your loan terms, consider making a higher down payment. For non-owner occupied real estate loans, a down payment of up to 20% may be required.
Keep accurate records
Traditional banks and online lenders will require certain documents when underwriting a loan for a VRBO business. Be sure to keep records of rental income, annual revenues, sales taxes paid, and property expenses so that a P&L statement or income tax return can be used to get approval for financing.
If you are using lender-provided financing for a VRBO, consider purchasing a home that could benefit from a value-add business model. Investors can buy a home that needs some work using a term loan or conventional mortgage, increase the value of the home through repairs and renovations, and then refinance the home loan or complete a cash-out refinance once the home is re-appraised at a higher value.
VRBO is an online platform that gives entrepreneurs the opportunity to earn revenue from providing short-term or long-term rentals to customers using a flexible business model. Some VRBO business owners simply rent out their primary residence, while others purchase several investment properties with hard money loans for the sole purpose of earning income.
Before starting a VRBO company, property owners should conduct market research and consult with experts regarding taxes, insurance, and marketing strategies, as well as make a detailed budget that details the capital expenditures, repair and maintenance costs, and operating expenses.
To learn more about funding options for your VRBO business, reach out to Biz2Credit today. New entrepreneurs can learn about the financing process by reading Gaurav Patel’s story about how the Biz2Credit experts helped him facilitate a CRE loan to meet his business goals.